B) Southern Exposure
In his critique of supply-side theorists, Brenner contrasts their disposition to view the world economy as the mere sum of its national components with his own attempt to see systemic processes as having a logic of their own.
[T]he emphasis of the supply-side theorists on institutions, policy and power has led them to frame their analyses too heavily on a country-by-country basis, in terms of national states and national economies—to view the international economy as a sort of spill-over of national ones and to see systemic economic problems as stemming from an agglomeration of local ones. In contrast, I shall take the international economy— the capital accumulation and profitability of the system as a whole—as a theoretical vantage point from which to analyse its crises and those of its national components. 
Laudable as this intent is, Brenner’s analysis falls short of its promise. In The Boom and the Bubble, as in ‘Global Turbulence’, he focuses almost exclusively on three national states/economies (the United States, Japan and Germany) and their mutual relations, with occasional references to other Western European countries and the ‘miracle economies’ of East Asia. China appears only fleetingly towards the end of ‘Global Turbulence’ and in little more detail in the closing pages of The Boom and the Bubble. The vast majority of the world’s states and the bulk of its population have, apparently, no bearing on the functioning of Brenner’s world economy.
Brenner admits that concentrating on three countries ‘does introduce distortions’ But without specifying what these distortions are, he goes on to justify his narrow focus on three grounds. First, in 1950, the US, German and Japanese economies taken together ‘accounted for 60 per cent of the output (in terms of purchasing power parities) of the seventeen leading capitalist economies and by 1994 that figure had risen to 66 per cent’. Second, each of the three economies ‘stood . . . at the hub of great regional blocs, which they effectively dynamized and dominated’. And finally, ‘the interaction among these three economies was . . . one of the keys to the evolution of the advanced capitalist world throughout the postwar period’. 
These premises are questionable on two grounds. The combined weight of the three economies in question is indeed considerable, though somewhat less than Brenner’s sources suggest.  Nevertheless, their combined share of value added in manufacturing—the branch of activities on which Brenner concentrates—has declined significantly in the course of the long downturn. The fall has been largely due to the rapid industrialization of many countries of the world’s South—what Alice Amsden has called ‘The Rise of the “Rest”’.  Moreover, as Amsden shows, the South’s share of world manufactured exports has been growing even faster than its share of value added in manufacturing, rising from 7.5 per cent in 1975 to 23.3 per cent in 1998, in sharp contrast with the Japanese, Western European and North American shares, which were either stagnant or declining.  By dealing with the world’s South in such a cursory way, Brenner tends to miss one of the most dynamic elements of the intensification of competition to which he attributes so much importance.
The second problem with Brenner’s focus on three countries is more serious: the virtual eviction of world politics from the analysis of capitalist dynamics. There is no question that the interaction of the United States, Japan and Germany has been ‘one of the keys’ to the evolution of world capitalism since the Second World War; but it has certainly not been the only one, or even the most important. As Brenner implicitly recognizes in the passage quoted on page nine above, throughout the long boom US interaction with Germany and Japan was thoroughly embedded in, and dominated by, the Cold War relations between the United States, the USSR and China. The crisis of profitability that marked the transition from the long boom to the long downturn, as well as the great stagflation of the 1970s, were themselves deeply affected by the parallel crisis of American hegemony which ensued from the escalation of the Vietnam war and the eventual US defeat. As for the Reagan–Thatcher neoliberal counterrevolution, it was not just, or even primarily, a response to the unsolved crisis of profitability, but also—and especially—a response to the deepening crisis of hegemony. All along, the trajectories of inter-capitalist competition and the interaction among the world’s three largest economies were shaped by the broader political context. The almost complete absence of world politics from Brenner’s story produces not only distortions but indeterminateness as well.
Consider the connexion between the crisis of profitability of the late 1960s and early 1970s and the contemporaneous breakdown of the gold–dollar exchange standard. As we have seen, Brenner implicitly acknowledges that ‘political costs’ played a role in the abandonment of gold, but nonetheless upholds the thesis that its primary determinant was the competitive struggle between American manufacturers and their German and Japanese rivals. We have already criticized this argument for ignoring the relatively autonomous role that workers’ leverage played in the crisis. Nevertheless, the most important determinant was neither inter-capitalist competition nor labour–capital relations but the direct and, especially, the indirect effects of the escalation of the Vietnam War on the US balance of payments. Although Vietnam is conspicuous for its absence in Brenner’s story, these effects do creep in on a few occasions. Thus, ‘stepped-up Vietnam War spending’ is said to be the reason for the sudden acceleration of price inflation in the United States which, between 1965 and 1973, slowed down but did not stop the growth of real wages. This acceleration of inflation, in turn, is held responsible for the weakening of the competitive position of American manufacturers, both at home and abroad, vis-à-vis their German and Japanese rivals in the same period. 
These casual observations show that even Brenner is forced to acknowledge that, behind the intensification of competition between US and foreign manufacturers, and the vagaries of labour–capital conflicts in the United States and elsewhere, there lurks an eminently systemic but political variable, which his research design has ruled out of consideration. This lurking variable is the power struggle in which the US government sought to contain, through the use of force, the joint challenge of nationalism and communism in the Third World. As the escalation of the war in Vietnam failed to break the back of Vietnamese resistance, and provoked instead widespread opposition to the war in the United States itself, this struggle reached its climax in the same years as the crisis of profitability. As I have argued elsewhere, the costs of the war—including those programmes aimed at stemming the tide of domestic opposition—not only contributed to the profit squeeze, but were the most fundamental cause of the collapse of the Bretton Woods regime of fixed exchange rates and the massive devaluation of the US dollar that ensued. 
Nadir of US hegemony
As Brenner maintains, the dollar devaluation of 1969–73 did help the United States to foist the burden of the profitability crisis onto Germany and Japan and check the pressure of rising money wages on profits at home. But I would argue that this redistribution of the burden was largely a by-product of policies aimed primarily at freeing the US government’s struggle for dominance in the Third World from monetary constraints. At least initially, the liquidation of the gold–dollar exchange standard did seem to endow the US government with an unprecedented freedom of action in tapping the resources of the rest of the world simply by issuing its own currency.  However, this free hand could not prevent the defeat of the United States in Vietnam nor stop the precipitous decline of American prestige in its wake. Indeed, if anything, it worsened that decline by provoking a worldwide inflationary spiral which threatened to destroy the entire US credit structure and the worldwide networks of capital accumulation on which American wealth and power had become more dependent than ever before. 
The decline of US power and prestige reached its nadir in the late 1970s with the Iranian Revolution, a new hike in oil prices, the Soviet invasion of Afghanistan and another serious crisis of confidence in the US dollar. Brenner hardly mentions this deepening crisis of US hegemony as the context in which, between 1979 and 1982, the monetary policies of the US government changed from ultra laxity to extreme tightness. He does trace the switch to ‘a devastating run on the US currency that threatened the dollar’s position as an international reserve currency’. But he has no satisfactory explanation for the flight and pays no attention to the Arab fears over Afghanistan and Iran which, according to Business Week, were behind the surge in the price of gold to an all-time high of $875 in January 1980.  As in the case of the liquidation of the gold–dollar exchange standard ten years earlier, war and revolution in the South, rather than inter-capitalist competition among the world’s three largest economies, were the primary driving force of the monetarist revolution of 1979–82. Fundamental change in the monetary sphere once again had major implications both for inter-capitalist and class struggles in core regions. But the strongest stimulus for the change came from the unsolved crisis of US hegemony in the Third World rather than the crisis of profitability as such.
Here too, the peculiarities of the late-twentieth-century long downturn may be usefully highlighted through a comparison with that of 1873–96. Though seldom remarked upon, differences in North–South relations between the two long downturns are even more significant than those of labour and capital. Most importantly, the earlier downturn occurred in the midst of the last and largest wave of Northern territorial conquest and colonization of the South, whereas that of the twentieth century took place at the tail-end of the greatest wave of decolonization in world history.  In between there stood the great ‘revolt against the west’ of the first half of the twentieth century which, in Geoffrey Barraclough’s view, marked the beginning of an entirely new era:
Never before in the whole of human history had so revolutionary a reversal occurred with such rapidity. The change in the position of the peoples of Asia and Africa and in their relations with Europe was the surest sign of the advent of a new era, and when the history of the first half of the twentieth century—which, for most historians, is still dominated by European wars and European problems . . . comes to be written in a longer perspective, there is little doubt that no single theme will prove to be of greater importance than the revolt against the west. 
The moment for the longer perspective advocated by Barraclough has obviously not yet come. We live instead in a time when the ‘triumph’, the seemingly unlimited power of the West, makes the earlier Southern revolt look insignificant, if not futile. Yet the fundamental difference between North–South relations during the two long downturns remains, and neither the origins, nor the trajectory, nor the consequences of the latest can be accurately deciphered except in its light. To illustrate the point I shall focus once again on the monetary aspects of the two long downturns.
In the preceding section we traced the inflationary character of the latest long downturn to the social and political impossibility of subjecting labour–capital relations in core regions to the discipline of a metallic standard, as they had been during the late nineteenth century. The nature and strength of this social constraint within core regions, however, themselves depend critically on the particular political arrangements that link the core to the peripheries. Nothing illustrates this better than the close connexion between Britain’s adherence to the gold standard and its extraction of tribute from the Subcontinent. Britain’s Indian empire was crucial in two main respects. First, militarily: in Lord Salisbury’s words, ‘India was an English barrack in the Oriental Seas from which we may draw any number of troops without paying for them’.  Funded entirely by the Indian taxpayer, these forces were organized in a European-style colonial army and used regularly in the endless series of wars through which Britain opened up Asia and Africa to Western trade, investment and influence.  They were ‘the iron fist in the velvet glove of Victorian expansionism . . . the major coercive force behind the internationalization of industrial capitalism’. 
Second, and equally important, the infamous Home Charges and the Bank of England’s control over India’s foreign-exchange reserves jointly turned India into the ‘pivot’ of Britain’s global financial and commercial supremacy. India’s balance-of-payments deficit with Britain, and surplus with all other countries, enabled Britain to settle its deficit on current account with the rest of the world. Without India’s forcible contribution to the balance of payments of imperial Britain, it would have been impossible for the latter ‘to use the income from her overseas investment for further investment abroad, and to give back to the international monetary system the liquidity she absorbed as investment income’. Moreover, Indian monetary reserves ‘provided a large masse de manoeuvre which British monetary authorities could use to supplement their own reserves and to keep London the centre of the international monetary system’. 
In enforcing monetary discipline at home on workers and capitalists alike, Britain’s ruling elite thus faced an altogether different situation to that of US leaders a century later. For one thing, the exercise of world-hegemonic functions—including the endless series of wars fought in the world’s South—did not involve the kind of inflationary pressures that the Vietnam War engendered in the United States. Not only were the wars financed by Indian money but, fought by Indian and other colonial troops, they did not require the kind of social expenditure the US government had to incur in order to contain domestic opposition to escalating casualties.
Costs of war aside, unlike the United States in the late twentieth century, Britain could internalize the benefits (for its metropolitan subjects) and externalize the costs (on its colonial subjects) of the ceaseless ‘structural adjustments’ involved in the subjection of its currency to a metallic standard. Coercive control over the surplus of India’s balance of payments enabled Britain to shift the burdens of its own persistent trade deficits onto Indian taxpayers, workers and capitalists.  In a post-colonial world, in contrast, no such blatant coercion was available. The United States faced the stark choice of either balancing its trade and current-accounts deficit through a drastic downsizing of its national economy and expenditures abroad, or alienating a growing share of its future income to foreign lenders. The choice of an inflationary strategy of crisis management was not dictated solely by the social and political impossibility of subjecting the American national economy to a drastic downsizing, or by the relief from foreign competitive pressures that the strategy could bring to US manufacturers. It was also a more or less conscious attempt not to choose between the two equally unpalatable alternatives. The deepening crisis of US hegemony of the late 1970s and the devastating run on the dollar it provoked were a shocking reminder that the choice could no longer be postponed.
The monetary counterrevolution initiated in the closing year of the Carter administration and pursued with greater force under Reagan was a pragmatic response to this situation. As Brenner notes, the turnaround deepened rather than alleviated the crisis of profitability. But as he does not note, it did reverse—beyond the rosiest expectations of its perpetrators—the precipitous decline in US world power of the preceding fifteen years.  In order to understand this unexpected reversal, we must once again shift focus to reexamine the processes of inter-capitalist competition that are at the centre of Brenner’s analysis.
C) Financial Underpinnings of the US Revival
Brenner, as we have seen, attributes the persistence of ‘overproduction and overcapacity’ after 1973 partly to the behaviour of higher-cost incumbent firms—which had ‘every reason to defend their markets and counterattack by speeding up the process of innovation and investment in additional fixed capital’—and partly to the actions of the US, Japanese and German governments, which aggravated rather than alleviated the underlying tendency towards ‘too little exit’ and ‘too much entry’. We also noted that, while governmental action occupies centre-stage in Brenner’s historical narrative, the theoretically more crucial argument about firms is for the most part developed deductively, on the basis of circumstantial evidence.
A first problem with this central thesis is that it is almost exclusively focused on manufacturing. Brenner does not give an explicit justification for this, as he does for his focus on the American, Japanese and German economies. The theoretical and historical identification of capitalism with industrial capitalism appears to be for him—as for most social scientists, Marxist and non-Marxist alike—an article of faith which requires no justification. Yet the share of value added generated in manufacturing worldwide has been comparatively small, shrinking steadily from 28 per cent in 1960, to 24.5 per cent in 1980, to 20.5 per cent in 1998. Moreover, the contraction has been greater than average in Brenner’s ‘advanced’ capitalist countries, the share for North America, Western Europe, Australasia and Japan combined having declined from 28.9 per cent in 1960, to 24.5 per cent in 1980, to 19.7 per cent in 1998. 
Brenner does seem to be aware of this problem but he sees it as a symptom of economic crisis rather than a reason for questioning the relevance and validity of his focus on manufacturing. Thus, in commenting on the ‘huge expansion’ experienced by the American non-manufacturing sector in the 1980s, he interprets it as ‘a symptom of the broad economic decline that accompanied the crisis of manufacturing in the US economy, which can usefully be called “de-industrialization”, with all its negative connotations’.  At one point, however, he does feel it necessary to provide some justification for his narrow focus on manufacturing.
It has become standard to downplay the importance of the manufacturing sector, by pointing to its shrinking share of total employment and GDP. But, during the 1990s, the US corporate manufacturing sector still accounted for 468 per cent of total profits accruing to the non-financial corporate sector (the corporate economy minus the corporate financial sector), and in 1999 it took 46.2 per cent of that total. The climb of pre-tax manufacturing profitability was in fact the source of the parallel recovery of pre-tax profitability in the private economy as a whole. 
Leaving aside the fact that it is not clear why profits in the corporate financial sector are not included in the comparison, this justification does not stand up to a close empirical scrutiny. As Greta Krippner has shown, on the basis of a thorough analysis of the available evidence, not only had the share of total US corporate profits accounted for by finance, insurance and real estate (FIRE) in the 1980s nearly caught up with and, in the 1990s, surpassed the share accounted for by manufacturing; more important, in the 1970s and 1980s non-financial firms themselves sharply increased their investment in financial assets relative to that in plant and equipment, and became increasingly dependent on financial sources of revenue and profit relative to that earned from productive activities. Particularly significant is Krippner’s finding that manufacturing not only dominates but leads this trend towards the ‘financialization’ of the non-financial economy. 
Brenner does not provide any indicator for his ‘over-capacity and over-production’ model comparable to Krippner’s multiple indicators for the financialization of the non-financial economy. Nevertheless, Anwar Shaikh does provide two indicators for ‘capacity utilization’ in US manufacturing—one based on his own measure, and one on that of the Federal Reserve Board—which we may take as imperfect inverse indicators of over-capacity.  Across the entire period 1947–95, both indicators show a great deal of fluctuation in capacity utilization but no clear long-term trend. More specifically, in line with Brenner’s argument, both indicators—especially Shaikh’s—suggest that over-capacity in US manufacturing decreased sharply during the closing years of the long boom and increased even more sharply during the crisis of profitability that marked the transition from the boom to the long downturn. After 1973, in contrast, both indicators continue to show considerable fluctuations but provide no evidence to support Brenner’s contention that the long downturn was characterized by above-normal over-capacity. The Federal Reserve Board’s figures show capacity utilization settling back to where it was in the 1950s with no trend either way, while Shaikh’s show capacity utilization in the 1970s at higher levels than in the 1950s and rising further in the 1980s and 1990s—suggesting a comparatively low, and declining, level of over-capacity.
Supplemented with what can be gauged from these imperfect indicators, Krippner’s unambiguous findings throw serious doubts on Brenner’s a priori assumptions concerning the behaviour of incumbent, higher-cost manufacturers. The predominant response of these firms to the irruption in their markets of lower-cost competitors does not appear to have been a strenuous defence of their sunk capital, and a counterattack through additional investment in fixed capital that further increased over-capacity. Although this kind of response was certainly present, the predominant response was, in capitalist terms, far more rational. Confronted with heightened international competition (especially in trade-intensive sectors like manufacturing), higher-cost incumbent firms responded to falling returns by diverting a growing proportion of their incoming cash flows from investment in fixed capital and commodities to liquidity and accumulation through financial channels.
This is what Krippner observes empirically. But this is also what we should expect theoretically, whenever returns to capital invested in trade and production fall below a certain threshold and inter-capitalist competition becomes a zero- or negative-sum game. Under these conditions—precisely those which, according to Brenner, have characterized the long downturn—the risks and uncertainties involved in reinvesting incoming cash flows into trade and production are high, and it makes good business sense to use them to increase the liquidity of assets as a defensive or offensive weapon in the escalating competitive struggle, both within the particular industry or sphere of economic activity in which the firm had previously specialized and outside it. For liquidity enables enterprises not just to escape the ‘slaughtering of capital values’ which, sooner or later, ensues from the over-accumulation of capital and the intensification of competition in old and new lines of business, but also to take over at bargain prices the assets, customers and suppliers of the less prudent and ‘irrationally exuberant’ enterprises that continued to sink their incoming cash flows into fixed capital and commodities.